War on the Horizon, Oil Jumps as Trump Rejects Iran
Oil prices rose sharply on Monday after U.S. President Donald Trump rejected an Iranian peace proposal aimed at ending the seven-month conflict between the two countries and reopening the Strait of Hormuz, keeping supply worries at the center of global energy markets.
Brent crude futures, the European benchmark, rose $3.43, or 3.3 percent, to $107.75 a barrel in morning trading, according to exchange data cited by Arab News and other outlets. U.S. West Texas Intermediate crude gained $2.14, or 2.3 percent, to $94.55 a barrel. Earlier in the Asian session, Brent had opened more than 1 percent higher before extending gains in European trading.
The Rejected Proposal
Iran unveiled the offer last week on the sidelines of the UN General Assembly in New York. Foreign Minister Abbas Araghchi told reporters the Strait of Hormuz would reopen and nuclear talks with Washington would restart within seven days, provided the United States met Tehran's conditions, which Iranian officials have described as an end to U.S. "acts of aggression," the lifting of the naval blockade on Iranian ports, the easing of restrictions on Iranian oil sales, and the release of frozen Iranian assets.
Tehran says the proposal was transmitted to the American side through Qatari mediators.
Trump confirmed on Saturday that he had turned the offer down.
"They made a proposal but I rejected it," he told reporters. In a telephone interview with Axios on Sunday, the president said the offer was "not the deal that I want to make" describing it as something "we would have maybe agreed to a year ago," but added that he expected U.S. negotiators to hold new talks with Iran this week. Asked whether he thought there would be progress on reopening the strait, he replied, "I think we're going to do great."
The Wall Street Journal, citing unnamed U.S. officials, reported that Trump has told aides he expects U.S. strikes on Iran to resume after November's midterm elections. The White House has not commented on that report.
READ: Trump, Iran and the Gulf: Deal Before Midterms, or War After Midterms?
Market Reaction
"The rejection has lowered hopes for an immediate breakthrough, although diplomatic efforts have not ended," said Sugandha Sachdeva, founder of New Delhi-based research firm SS WealthStreet.
The rise reverses some of the optimism that had lifted markets late last week, when Brent had briefly traded near $108 on Thursday before falling back on Friday as news of the Iranian offer emerged.
Oil's week-on-week picture remains divided. Brent edged up 0.4 percent last week, while the U.S. benchmark plunged 7.9 percent, a divergence driven not by geopolitics but by the domestic American fuel market.
The Diesel Dilemma
The unusual split between the two benchmarks reflects fears that Washington could ban diesel exports to curb record-high prices at home, a step analysts warn would backfire on U.S. refining.
"Refined petroleum products remain a problem area, with record U.S. diesel prices intensifying inflation risks and renewing debate about possible export restrictions," analysts at ANZ said in a note. Any restriction on U.S. diesel exports, they said, would tighten supply outside the country, with European prices reacting to the prospect of a reduction in U.S. supplies.
U.S. diesel prices hit a record level earlier this month, one widely cited figure is $6.53 a gallon, up from an average of about $3.50 in January, before the Middle East conflicts began. U.S. refiners are already running near capacity, with utilization above 95 percent for much of the summer, leaving little headroom to raise output. Analysts at S&P Global estimate a full export ban could ultimately force U.S. refiners to cut crude processing by more than 10 percent.
Six of the seven largest buyers of U.S.-refined diesel are in Europe or Latin America, Brazil, Chile, Mexico, Peru, France, and the United Kingdom, meaning any U.S. restriction would land hardest on those importers.
Supply Flows Recover — For Now
Underlying the price moves, physical oil flows in the region have partially recovered from the lows reached after the war began in February.
Crude exports from key Middle East producers rebounded in September to 12.8 million barrels a day, the highest level since the start of the war, according to preliminary data from the analytics firm Kpler. The increase was driven by higher exports from Saudi Arabia and the United Arab Emirates.
Deliveries through the Strait of Hormuz have also picked up, and are expected to reach about 7.4 million barrels a day this month, the data showed. Saudi Arabia has redirected exports from the Red Sea port of Yanbu back to its eastern port of Ras Tanura following attacks that damaged the East-West pipeline, a rerouting that has kept barrels moving despite the fighting, but at higher cost and risk.
The recovery remains fragile. Yemen's Saudi-led coalition said Saturday it had intercepted two ballistic missiles and two drones launched by Iran-aligned Houthi forces toward the kingdom, and ANZ analysts noted that "geopolitical risks remain elevated," with regional supply flows still vulnerable.
Three dates and dynamics now frame the market: whether the new round of U.S.-Iran talks Trump predicted for this week actually materializes; the state of American fuel policy ahead of the November midterm elections, which analysts see as a factor in the diesel export debate; and the trajectory of tanker traffic through the Strait of Hormuz, on which Europe and Asia's supply and the global price of oil, continue to hinge.